Capital gains exclusion with military service on sale of Rental after retirement

[clarKent]

[foreward: not real name, created for number crafting]

BLUF: Complex situation regarding sale of primary turned rental, passing 2 of 5 year test with 10 extension due to military service, but sale occurring 9 months after retirement [and end of qualified extension]

Hello, I have a home that I am in the process of selling [est sale Jun 22].  I anticipate that my net gain after mortgage payoff will be around 145,000.

I purchased a property as primary residence in 2008, then received military orders for transfer in 2010, at which I converted to rental property.  I had resided in it for more than 2 years.

I have retired Sep 21, after 20 years.

Am I able to claim capital gains exclusion based on 2 out of 5 years [with 10 year extension]?

My logic, the 10 year suspension would have ended when I retired, and began 10 years prior [Sep 11-Sep21], if I use the date of sale in June of 2022, which would push the 5+10 years all the way to June of 2007, how would I claim Capital Gains Exclusion?

[SweetieJean]

I'm sure others will answer your questions, but I wanted to point out that, in calculating the gain for tax purposes, you do NOT consider the mortgage payoff.

[Hal_Al]

Q. Am I able to claim capital gains exclusion based on 2 out of 5 years [with 10 year extension]?

A. Yes. Yes, your logic is correct.

As SweetieJean said, you disregard the mortgage payoff.  It does not enter into the capital gain calculation. Your gain is sales price less cost basis (what you paid for it + any improvements) less expenses of sale.

Q. How would I claim Capital Gains Exclusion?

A. The TurboTax interview handles this. The sale  can be entered in the rental section. Alternatively, you can enter it as a home sale (my preference).

In the rental section show that  you ceased renting the property. Then enter the sale  at Less Common Income / Sale of Home. The interview should ask about your military time exception.  When asked if you had a period of non-qualified use (rental), answer NO.  In TT, at the page where it asks if you had any other use of the home it says: "Note: if you used your home for reasons other than primary residence, after it was no longer your primary residence, select 'no'''. Any portion of the 5-year period (+10 year extension) ending on the date of the sale or exchange after the last date you (or your spouse) use the property as a main home is not considered non-qualified use. 

Follow the interview carefully.

[Critter-3]

Step 1 ... pull the assets out of service by converting to personal use in the rental section.

Step 2 ... save/print a copy of the depreciation worksheet in the PRINT CENTER  ... you will need the depreciation taken to date in step 3

Step 3 ... do NOT sell the rental in the rental section  OR  the sale of  business assets section ... ONLY use the sale of personal residence section.

[Carl]

I purchased a property as primary residence in 2008, then received military orders for transfer in 2010, at which I converted to rental property. I had resided in it for more than 2 years.

I have retired Sep 21, after 20 years.

Actually, based on the way I'm counting IAW the IRS publication 523, you may not qualify for the full exclusion.  Maybe just a partial exclusion. It depends on your closing date on the purchase, and the date you departed under PCS orders.  It's important to understand that the IRS does not grant any period of "extension". It's a "suspension" of the day count. That day count can be suspended for a maximum of 10 years.

You need to have lived in the home as your primary residence for 730 days or more, of the last 1826 days you owned it, counting backwards from the closing date of the sale.

Since you don't state exact purchase or PCS departure dates above, I'm going to use the middle of each year, which is July 1st.

My logic, the 10 year suspension would have ended when I retired, and began 10 years prior [Sep 11-Sep21],

That logic is flawed. The 10 year suspension period ends 10 years from the date you moved out of the property under PCS orders, or on the date of retirement/separation from the military; whichever occurs first.  For example, if you had retired in 2016, the day count would restart on your retirement date. In your case, using my assumed date of July 1st, the day count restarted 10 years later on July 1st, 2020 - not your retirement date in 2021.

Just want to clarify that so you can figure your day count correctly. I can't do it, since I don't know the closing date of your original purchase, or the date you departed, or the date you converted the property to a rental.